Cost Analysis5 分钟阅读

The Erosion Effect of Fees and Taxes

A 0.5% fee per year? "How much could that possibly be." But 20 years later, that 0.5% may have taken 10% of your gains.

Types of Fees

There are several types of fees when you invest.

TER (Total Expense Ratio): For ETFs, it is automatically deducted from assets each year. Korean ETFs are usually 0.05-0.5%, and overseas ETFs 0.03-1%. At a 0.5% expense ratio, about $7.4 out of every $1,480 is automatically withdrawn each year.

Trading commission: Occurs every time you buy a stock/ETF. At online brokerages, 0.015-0.25%. For monthly recurring investing, on a monthly investment of about $74, that is about $0.10-0.20.

Spread: The difference between the bid and ask prices. For ETFs with low liquidity, the spread can be large.

20-Year Compounding Effect: The Real Impact of a 0.5% Fee

Assumptions: 7% annual return, an initial lump-sum investment of about $7,400, held for 20 years

With no fee: about $7,400 -> about $28,700 With a 0.5%/year fee: effective return 6.5%, about $7,400 -> about $26,100 With a 1.0%/year fee: effective return 6.0%, about $7,400 -> about $23,700

The 0.5% fee took about $2,600 (about 10%) over 20 years. At 1.0%, it would be about $4,900 (about 17%).

This is why choosing low-cost ETFs matters more the longer you invest.

The fee effect works through compounding, not linearly. At 30 or 40 years, the difference grows even larger.

Taxes: What Korean Investors Should Know

Dividend income tax: 15.4% of dividends (including local income tax). It also applies to overseas ETF dividends. If you become subject to comprehensive financial income taxation (over 20 million KRW per year), a higher rate may apply.

Capital gains tax: Arises when selling overseas-listed ETFs or overseas stocks. There is a basic annual deduction of 2.5 million KRW, and 22% (including local tax) on the excess. Domestic-listed stocks and ETFs are taxed only if you meet the major-shareholder criteria.

Financial investment income tax: Scheduled for introduction from 2025, but policy changes are possible. Always confirm the latest tax law with the National Tax Service or a professional tax accountant.

The Difference Between This Service's Results and Your Real Return

All returns in this service are pre-tax and exclude fees. (However, when using the fee-comparison feature, fees are included.)

To calculate your actual take-home amount, you must deduct taxes. For example, if you earned a gain of about $7,400 on an overseas ETF, you would deduct roughly $1,220 in capital gains tax (after the deduction, the taxable portion times 22%). Even so, your after-tax gain is about $6,180.

Taxes may feel large, but paying tax means you made that much profit. Paying no tax at all means there was no profit either.

常见问题

Q. What taxes apply to overseas ETFs?

If a Korean resident holds an overseas-listed ETF (such as one listed on a U.S. stock market): distributions are subject to a 15.4% dividend income tax, and sale gains are subject to a 22% capital gains tax after the annual basic deduction of 2.5 million KRW. For domestic-listed ETFs (e.g., KODEX S&P500), distributions are subject to dividend income tax, and sale gains have a different tax structure. Tax law changes often, so always check the latest information.

Q. How important are fees over the long run?

Assuming a 30-year long-term investment, a 1% per year difference in fees can swing the final assets by 20-30%. This is why Buffett emphasized that "the low cost of index funds is the key to long-term investing." Since it is easy to compare Korean ETF expense ratios, if two funds track the same index, choosing the one with the lower expense ratio is reasonable.